29 November 2010 Weekly Commodity Compendium Nick Moore Head of Commodity Strategy +44 20 7678 0555 nick.metals.moore@rbs.com Daniel Major Commodity Analyst +44 20 7678 4146 daniel.major@rbs.com RBS – Weekly Commodity Compendium No.106 Long aluminium short silver – top trade for 2011 This material should be regarded as a marketing communication and may have been produced in conjunction with the RBS trading desks that trade as principal in the instruments mentioned herein. In conjunction with RBS top themes and trades for 2011 (follow link to view) detailing a range of cross asset class trade ideas from RBS analysts, we highlight our top commodities trades for 2011. Long 3M LME aluminium at US$2,250/tonne. Target US$2,700/t, stop at US$2,000/t; short silver at US$27/oz, target US$20/oz, stop at US$30/oz. The case for aluminium: Aluminium is the sleeper in the base metal pack, left behind by soaring copper. Whilst all eyes have been on copper, aluminium has been leached of speculative interest. But calmly and quietly the light metal looks to be on course to enjoy world demand growth in 2010 in excess of 15% and the best yoy growth in 30 years. Since the 1970s, the copper price has traded at 1.5 times that of aluminium – it is currently 3.7 times as expensive. Aluminium is set to play catch up and redress the imbalance. Bull factors also include 1) the potential launch of a couple of physically backed aluminium ETFs in excess of 1mt of metal, which could help drain the market of excess supply. 2) That Exchange inventories of metal are no longer building, but now into the third consecutive quarter of net erosion. 3) That over a third of high cost European smelter capacity could close due to onerous power costs and sub scale size and 4) The unwinding of the fixed alumina price ratio in favour of higher alumina prices will likely increase cost pressure for higher cost smelting capacity increasing the chance of closures. On a risk reward basis, aluminium looks to be attractive. The case against silver: Silver has had a well deserved and truly stunning price rise during 2010 even outperforming gold as shown by the gold: silver price ratio. In February this year 1oz of gold would buy 70 ozs of silver. Currently, 1oz of gold will buy you 28% less at just 50ozs of silver – the lowest since March 2008! Indeed, the over 50% silver price breakout from $19/oz in late August to $29.33/oz, has been as sheer as the North Face of the Eiger, and took silver to 30 year highs in nominal terms. But silver is a crowded trade. Looking ahead what concerns us is that much of silver’s price gain has been the reflected glory of a soaring gold price and we expect lower gold prices in 2011. In addition we estimate that there is now in the family of physically backed silver ETFs, a record 14,953 tonnes of silver equivalent to 66% of annual world silver mine supply! There is a real likelihood that the pin-striped financial investor is unable to absorb additional silver supply to the market and that some of this overhanging ETF silver is liberated into the market depressing the price. Lower prices beckon. Source: Bloomberg, RBS Aluminium: silver ratio (oz of silver per tonne of aluminium) – silver at most expensive for 23 years 501001502002503003504004505008789929496990103060810 The Royal Bank of Scotland Consensus mining equity valuations, the week ahead and moreWeekly Commodity Compendium |29 November 2010 2 Bloomberg consensus valuation multiples for some of the major US and European miners EV/EBITDA P/E P/B 2009 2010 2011 2012 2009 2010 2011 2012 2009 2010 2011 2012 Anglo American 11.2x 6.3x 4.8x 4.1x 20.8x 11.2x 8.5x 7.8x 2.34x 1.83x 1.56x NA Antofagasta 11.9x 7.0x 4.0x 3.8x 30.5x 17.4x 10.7x 10.6x 3.81x 3.35x 2.83x NA BHP Billiton 10.4x 9.1x 6.0x 5.1x 17.3x 12.3x 9.3x 8.7x 4.53x 3.59x 2.78x 2.20x ENRC 9.6x 5.9x 4.7x 4.4x 17.5x 9.1x 7.3x 6.9x 2.37x 1.94x 1.59x 1.33x Rio Tinto